How to evaluate the segments

Factors that make a market attractive

When evaluating the target segments, marketers must compare the market attractiveness and the company’s capability to meet the needs of that market. There are several factors to understand what makes a market attractive:

• Market size – generally larger markets are considered more attractive than small ones, since achieving economies of scale is more likely. Larger markets tend to be also more competitive as more suppliers are targeting the same segment due to its revenue potential.

• Market growth – growing markets are considered more attractive than stagnant or declining markets. Here again competition will be fiercer therefore analysis of growth should always be accompanied with competitor analysis.

• Market profitability – this is normally derived by considering the market size and the costs for attracting these segments

• Price sensitivity – in markets where price is the main driving factor for a purchase, margins of each sale will be small and volume would need to compensate for that. Markets will low price sensitivity are considered more attractive since margins can be maintained.

• Bargaining power of customers – when both distributors and end customers can exert high pressure on a supplier, they make a market segment unattractive as profit margins are reduced.

• Bargaining power of suppliers – where supply is controlled by a few large companies and competition is limited, suppliers can dictate the prices and reduce the market attractiveness.

• Barriers to entry – high barriers to entry could be in the form of large capital expenditure to enter a market, intellectual property patents or high switching costs for customers.

• Barriers to exit – these are the disposal costs of large manufacturing set ups or the ongoing commitment to clients to provide or service products. Both types of barriers make a market segment more risky to consider.